Foreign investors rethink US Treasuries

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US treasuries are becoming “less attractive to non-US investors” as the currency strengthens and investors should look at other income sectors as the Fed signals a hike in interest rates, says BlackRock’s global chief investment strategist.

Richard Turnill says: “It’s time to rethink the role of US Treasuries in portfolios. The collapsing cushion comes as long-term yields are starting to rise. We see a steeper yield curve ahead amid a gradual pivot toward fiscal expansion globally, although central banks still have the ability to limit any unwanted yield rises.

“US Treasuries are becoming less attractive to non-US investors, as the increased cost of currency hedging is wiping out the extra yield Treasuries offer.

“Finally, bonds tend to have higher correlations to stocks during periods when markets are concerned about Fed tightening, damaging their traditional role as portfolio diversifiers. This is a risk as the central bank’s December meeting approaches.”

Turnill notes the US 10-year note yield rose two basis points to 1.6 per cent this morning, according to Bloomberg.

Over the last 12 months US government bonds have returned 4.5 per cent cent compared to US investment grade and emerging market dollar bonds which returned 8.4 per cent and 14.8 per cent respectively.

“Longer-maturity US government bonds still have a role to play  and should buffer portfolios in any flights to safety,” Turnill says “But investors today are paying a lot for this diversification benefit.

“Depressed yields mean there is currently little safety cushion for holders of US government bonds. Just a 0.2 percentage point increase in Treasury yields could wipe out a whole year’s worth of yield income.”

He says he would recommend shorter-term corporate and municipal bonds and gold as better diversifier in the portfolio.

But AJ Bell investment director Russ Mould says long duration US Treasuries “have still a role to play” as there’s no guarantee the Fed will raise rates in December or that inflation will pick up.

He says: “Capital loss is unpleasant but there’s no guarantee this will happen. You can still make a case for long duration if you are looking for income, especially with the dollar on your side.”